Michigan and Ohio are Not Examples of “Failed Low Tax Policy”
July 7, 2009
A curious argument we’re seeing in state budget debates lately are that some of the states in the most serious trouble and typically considered high-tax states, are actually low-tax states, proving that low taxes don’t work! We’ve seen this described of California, Michigan, and Ohio recently.
None of these states are low-tax states. For an explanation of why California is a high-tax state even though it has Proposition 13, see this post earlier today.
As for Michigan, we encountered this curious assertion from a state legislator:
If lower taxes were the sole key to a successful state, i.e., one with high per capita income and low unemployment, this decade should have been good for Michigan. In the 1990s, our state’s income tax rate was 4.4%, and our main business tax, the Single Business Tax, had a rate of 2.35%. Most of this decade, we have had an income tax of 3.9%; our SBT was down to 1.9%.
In 2000, Michigan spent 9.49 cents out of every dollar in personal income on state government. Today we are spending 7.69 cents of every dollar earned on state government – a 19% reduction in overall state tax burden.
Three points. First, Michigan’s admirable flat income tax isn’t exactly low compared to other flat taxes. Michigan’s 4.35% is below Colorado’s 4.63%, Massachusetts’s 5.3%, and Utah’s 5%, but above Illinois’s 3%, Indiana’s 3.4%, and Pennsylvania’s 3.07%. Second, the Single Business Tax is an awful tax, a gross receipts tax, that is enormously distorting whatever the rate is. Third, our State-Local Tax Burdens report, which calculates how much each state’s residents pay in state-local taxes, finds that Michigan residents in 2000 paid 9.4% of their income in state-local taxes. In 2008, it was still 9.4%. Whomever that mythical tax cut went to, it wasn’t Michigan residents.
Four years ago, the Ohio General Assembly ap proved the biggest overhaul of Ohio’s tax system in a generation. The income tax and business taxes were slashed in overall tax cuts worth more than $2 billion a year. The idea was to spur investment and jobs. As legislators meet in Columbus to decide how to balance the state budget, it’s a good time to ask: Has tax reform worked?
There has been no such tax cut in Ohio. Again, our Burdens report found that Ohio residents paid between 10.3% of their income in state-local taxes in 2005 and 10.4% in 2008. As this rebuttal notes, the original writer conveniently leaves out Ohio’s awful gross receipts tax enacted as part of the “tax reform” in 2005 and myriad local income taxes. As we said last month:
- True, Ohio will soon have no corporate income tax. But it has something even worse: a gross receipts tax, called the Commercial Activities Tax (CAT). This pernicious tax hits the receipts of profitable and unprofitable companies alike, and pyramids through the chain of production, distorting price signals. Essentially all public finance experts revile such taxes, and they hit business activity hard. The CAT is probably worse than the tax it replaces, and for the moment, Ohio businesses have to pay part of both of them.
- Second, while the state has been reducing its high income tax rates to a medium top individual income tax rate, Ohio also has a lot of local income taxes. The rates and brackets are numerous and complex (the state rates go to the thousandth of a decimal point, and there are 5 brackets below $40,000, for instance).
We can certainly debate whether or not low tax policy is best for the certain economic and budgetary situation. But claiming that California, Michigan, and Ohio are low-states states is just not true.
(PS, even if low taxes didn’t work, does that necessarily mean that high taxes will?)